Key Takeaways

With upward revisions to May and June data, growth is averaging 224,000 over three months

Trade concerns still appear to weigh on the market as China threatens new tariffs [Trade concerns still appear to weigh on the market as China threatens new tariffs]

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(Friday Market Open) July’s job growth fell short of expectations, but there’s still a lot to like about Friday’s monthly payrolls report.

While the Labor Department reported job gains of 157,000, missing the 190,000 that Wall Street analysts had expected, it would be a mistake to focus only on that one headline figure. Looking deeper into the data, the government made big upward revisions to jobs growth in May and June, raising that combined number by 59,000. When it’s all put together with July’s number, job growth has averaged a healthy 224,000 the last three months.

In addition, today’s report didn’t appear to provide nervous investors with any additional ammunition when it comes to inflation. Year-over-year wage growth turned out to be the same in July as in June at 2.7%. While that’s a solid rate that’s putting more money in workers’ pockets, it’s not the 3% or above figure that might have gotten the market concerned about a more aggressive Fed rate hike cycle.

The overall unemployment number ticked down to 3.9%, staying in the range where it’s been for a while now, and once again we saw jobs created in many of the industries that often provide careers, not just jobs. These include growth of 51,000 new positions in business and professional services, 37,000 new jobs in manufacturing, and 19,000 in construction. In fact, construction has added more than 300,000 jobs since a year ago, so if you see a lot of cranes in your area, that’s probably not a mirage.

If there’s a downside to the report other than the headline number missing Wall Street’s expectations, it might be that there was no growth in the labor force participation rate, which is still stuck at 62.9%. That number remains historically low. Also, the number of long-term unemployed remained essentially unchanged, the Labor Department said, and the number of “re-entrants” to the market fell after rising in June. Re-entrants are people who had been out of the labor force but decided to come back, and it can sometimes be a good measure of strength in the economy if you see people throwing their hats back in the ring after an absence.

Still, those are minor quibbles with a report that overall looked pretty solid. The markets initially seemed to react positively, with all three major U.S. indices moving slightly higher in pre-market trading at first. They then turned a little lower, perhaps because some investors saw the headline number miss and amid some worries about the trade situation. China threatened tariffs against $60 billion in U.S. goods, so that might be a factor as the session continues.

That’s Trillion With a T

Apple (AAPL) on Thursday became the first U.S. publicly traded company to hit a market capitalization of $1 trillion, and those headlines seemed to help boost the wider market. AAPL is worth more than the annual gross domestic product of most nations on earth, which is saying something for a company that was once on the verge of bankruptcy.

The tech company’s shares surged this week after it reported stronger-than-expected revenue and earnings. It appears that the iPhone maker has helped to stem negative sentiment on the tech sector after mixed quarterly results from other tech companies. But because Apple is so widely held, it appears that the positive sentiment surrounding the psychologically important $1 trillion mark also helped lift the wider market out of a trade-related slump on Thursday.

That’s Also Trade (or Tariffs) with a T

Earlier Thursday, the three main U.S. indices were in the red as investors appeared to worry about the next phase in the ongoing trade battle between the U.S. and China, with the U.S. administration now threatening to slap 25% tariffs on $200 billion in Chinese goods, more than double the original proposal of 10%.

But by the end of the day, the tech heavy Nasdaq (COMP) had finished 1.24% higher, and the information technology sector’s gain of 1.37% had helped the S&P 500 (SPX) move into positive territory. The Dow Jones Industrial Average ($DJI) ended just 0.03% lower, erasing marked losses from earlier. Some of the recovery may simply have reflected some investors shrugging off the tariff news as just another in a series of headlines on this issue. Continued strength in tech earnings—which are up on average more than 30% for Q2—probably also helped.

Earnings drive the market, despite lots of geopolitical noise. So far, nearly 400 companies in the S&P 500 have reported results and about 73% have topped earnings expectations, according to FactSet. At this point, strong earnings might be outweighing the trade battle in many investors’ minds, at least judging from the fact that all the major indices remain near all-time highs.

FIGURE 1: Turn-Around Thursday For Tech: The tech sector (candlestick) sagged last week amid concerns about the social media space, but came back Thursday as Apple (purple line) took off following the company’s strong earnings and it’s attaining $1 trillion in market value. Data Source: S&P Dow Jones Indices.Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Rig Watch: With the latest weekly Energy Information Administration data showing a surprise build in U.S. crude inventories of 3.8 million barrels, this Friday’s weekly oil rig count from Baker Hughes might be worth a look. The rig count has been on a slow but steady rise for some time, with 90 more rigs operating now than a year ago, according to the company. The rig count rose by 2 last Friday to reach 1,048, compared with just over 400 in operation back in June 2016 when oil prices were substantially lower.

However, with U.S. oil production near an all-time high of 11 million barrels a day, and U.S. oil prices that seemed to run out of steam after crossing $70 a barrel, it could be interesting to see if companies continue putting new resources into extraction. The question might become more timely as the U.S. “driving season’s” traditional Labor Day conclusion approaches in a month. All this said, U.S. gasoline demand has been strong, and crude stockpiles remain below the five-year average for this date.

Sector Rotation: Amid the technology sector’s recent slip prior to Apple’s surge, it appears that investors simply moved some money into other sectors rather than pulling it out of the market altogether, according to investment research firm CFRA. Between a peak on July 25 through the end of the month, the information technology sector fell 5% as prominent social media companies reported revenue and/or earnings misses, the firm said. “Encouragingly, investors rotated, rather than retreated, pushing seven of the 11 sectors higher by nearly 1% or more during this same period, allowing the S&P 500 to slide by only 1%,” the firm said. “Sub-surface rotation supports a constructive bias toward U.S. equities.”

Producer and Consumer Prices: This week provided lots of economic data for investors to digest. So it’s perhaps relieving that next week’s economic data calendar is relatively light. Still, there are two pieces of data on tap that have a chance of providing key insights into the inflation situation—the producer price index (PPI) and the consumer price index (CPI). One way that producers can deal with rising input costs is by passing costs along to consumers. And, of course, once prices start rising for consumers, that can dent their spending power and cause a decrease in consumption. That would be a big deal given that consumption is the biggest component of U.S. GDP. But given the recent pace of economic growth, any pullback in consumption in the short term seems unlikely. The greater concern might be the opposite—an acceleration of inflation that might trigger a more aggressive rate hike path by the Federal Reserve.

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